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Oral Evidence

Taken before the DLABC

on Tuesday 6 November 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Mr Clive Betts

Meg Hillier

Mark Pawsey

Valerie Vaz

Heather Wheeler


Examination of Witnesses

Witnesses: Carolyn Downs, Chief Executive, Local Government Association, Stephen Hughes, Chief Executive, Birmingham City Council, Steve Parkinson, National Executive Council Member, Society of Local Council Clerks and Joanna Simons, Chief Executive, Oxfordshire county Council, gave evidence.

Chair: We are now in session. Meg wants to declare an interest.

Meg Hillier: I need to declare that my husband works for the Local Government Association, but he does not deal with audit.

Q152 Chair: I welcome you all. Thank you very much for agreeing to come this afternoon. We have about an hour for this session and then we move into a discussion about health. I am grateful to see you all.

I am going to start with a general question, so whoever wants to tackle this one, feel free. Let me contextualise it. Our job is to look at the draft Bill as it is currently drafted and to see what gaps there are and what amendments we think we should propose to the proposed legislation. So that is where we are.

On the whole, you are a bunch of people who welcome the change. That is how we have tended to see it, but even in that context, can you tell us where you think the risks and gaps remain in the draft Bill? Carolyn, do you want to start on that?

Carolyn Downs: I am happy to. Thank you, Chair. One of the real risks is that there is a clear divergence in view about the need to have independent appointment panels-for the local auditor to be appointed independently by a panel. Over 80% of local government is saying that that is just not practicable to do. If you are in Oxfordshire or Birmingham, it will probably be much easier for you to find people from whom you will be able to choose independent panel members. If you are in a rural district area, you will find that much more difficult. There is a real divergence between the local government view and the central Government view about that. One of the things it would be useful to explore is whether a middle ground can be achieved.

Q153 Mr Bacon: May I stop you there? Just so that we are clear, can you describe, assuming it were possible-some people think it is; some people think it isn’t-to appoint an independent person to an audit panel, what sort of person one would be talking about who would be-

Joanna Simons: Could I come in with an example? We have had an independent representative on our audit committee for the last 10 years in Oxfordshire. When we started this, we were trying to recruit more than one independent member. We failed in that. If a major university town has difficulty finding somebody with the right background, it is going to be very tricky to do so in areas that do not have access to the sort of people who might be interested. For example, our audit member happens to be somebody who is a qualified accountant, with an academic background, who is interested in local government finance, so we are doing pretty well, but it was hard going for us even to get that.

Q154 Chair: So what do you suggest should be in the draft legislation? What is the compromise? If it was hard for you to get that and, as I understand it, local government does not want a second tier, a separate local audit committee or whatever it is, what is your answer to that?

Joanna Simons: There are two aspects. In terms of having a panel, most authorities have got an audit committee, and that is certainly something I think we would all say-

Q155 Chair: But as I understand it, the audit committee members are local authority members, so in an authority with 100% one-party control, that does not give me, as Chair of the Public Accounts Committee, much confidence that there is real independence.

Carolyn Downs: I understand the issue about independence, which relates to whistleblowing and so on. One of the ways you can achieve independence, given the divergence of opinion, is to think about a sector-led approach where there is a body that could do the procurement and commissioning of audit. It is just a thought, but at the moment there is such a huge divergence of opinion-

Q156 Chair: It sounds like the Audit Commission mark 2.

Carolyn Downs: You said that we were all in favour of the abolition of the Audit Commission. I think it is important just to state clearly our view-certainly what the LGA’s position was. The LGA campaigned actively for removal of the CAA and top-down inspection. I do not think the appointment of auditors was an issue on which we campaigned, actually.

Q157 Mr Betts: I think it probably was. I think the LGA, when it came to give evidence to the Select Committee, was pretty clear that it wanted individual authorities to appoint their own auditor. I may be mistaken, but I feel sure that was the evidence you gave us.

Carolyn Downs: Given the current legislative framework, in which we are now operating, that was without doubt our response-that there should be consistency in central Government policy, and that different public sector bodies should be treated similarly. So, if further education colleges and NHS trusts are allowed to appoint their own auditors, then local government should be allowed to appoint its own auditors as well.

Q158 Mr Betts: Let’s say that this is one thing, but getting things right is another, maybe, in terms of local authorities and local government. Is the LGA coming to us today and saying that you would be equally satisfied with a regime where there was a body appointing auditors, as long as it did not have all the trappings of the CAA and all the top-down targets and things associated with it? If it were a body, as exists now with the Audit Commission, that simply appointed auditors at very good rates, you would be content with that?

Carolyn Downs: What I am saying to you is that, given that there is such a divergence of opinion between the positions of central Government and local government, a middle ground between the two needs to be explored. I am clear that the LGA’s position is that local government, like other parts of the public sector, should be able to appoint its own auditors. If the Government are insistent that we have independent audit panels, we think it is impractical and is not going to work, and therefore there needs to be a discussion.

Q159 Mr Bacon: I did not really get an answer to my question. The description of independent audit panels given to us last week in this Committee made it sound as if they were possibly an unnecessary adjunct; that they were superfluous, perhaps. But that is currently what is in the Bill, and your suggestion is that that be deleted.

What I am trying to get to is, if it goes ahead and does not get deleted, who would such people be? Miss Simons, in answering the question, basically said, "Even in the best of times, we find it extremely difficult." What I am really after is not, "It can’t be done"-it can always be done if you try hard enough and devote enough resources to it-but, "Who would such people be if you were required to do it?"

Carolyn Downs: When I was required in central Government and to appoint independent people to the audit committee, we asked for people who had public sector experience-

Chair: Hang on a minute. I am going to bring in Stephen, because that is very different.

Q160 Mr Bacon: My question is not about central Government but about local government.

Carolyn Downs: I am giving you an example. Presumably, one would use the same kind of criteria. One would ask for people with appropriate experience as finance directors in a public or private sector background to sit on your audit committee.

Q161 Mr Bacon: Or people in local government. I can think, in our local rural district council, of an ex-district councillor-now a county councillor-who is a technical accountant. There are lots of people like that around across the country; they are not only available to central Government.

Carolyn Downs: No, but one needs to determine whether they would be prepared to do it or not. That is a different matter. When local government has appointed independent people to its standards committees in the past, to be honest, it has been difficult to get people. They get very little remuneration for it, and to get the kind of people of the standing that-

Q162 Chair: We have a lot to get through. I am going to bring in Stephen Hughes and then Joanna Simons on this, and then I want to go back to Carolyn for other gaps, because we are dealing with the first one.

Stephen Hughes: I think the starting point is that I would like to be able, as a large local authority like Birmingham, to appoint our own auditors. I do not see the risks that you see.

The interesting thing about who the independent members are going to be is that if you have a one-party council, presumably, the councillors are appointing the independents on the audit committee, so if they really want to rig the selection process, they can always pick independents whom they like in order to get the decision that they want. Having independents on the panel does not protect it.

Q163 Chair: I accept that as a criticism of the Government’s proposal. Our interest, certainly in the Public Accounts Committee-that bit of Parliament-is to ensure that proper independence is built into the structure.

Stephen Hughes: First, you will have to choose them from an approved list. They have to reach certain standards before they can be chosen. Secondly, they have their own professional standards to which they have to adhere. If they do not adhere to them, they will be struck off from both the lists and their ability to do audits generally. Auditors of public and private sector bodies have to demonstrate their independence.

Q164 Chair: Let me just come back at you on that one. We are aware of that. The auditors you yourselves chose to appoint-we accept that it is very difficult to get an independent way of appointing them within a local authority, because you can fiddle it. That is what you have basically said to us.

Stephen Hughes: Well, if you are really that determined.

Q165 Chair: You can rig it is probably a better way of saying it. If that is the case and the auditors decide, however qualified they are, to do a critical report of Birmingham City Council, which your members do not like, the council can decide to get shot of them.

Stephen Hughes: There is a process for getting rid of them, which is complex and long-winded. It is more likely that they would not get an extension to their contract, or something along those lines. But we have our own public obligations when going through procurement exercises. We have to demonstrate that in taking decisions around procurement we achieve value for money and so on-

Q166 Chair: But you yourself have admitted-

Stephen Hughes: As you know, we are not taking into account irrelevant considerations.

Q167 Chair: But you have yourself admitted that they may not get re-appointed.

Stephen Hughes: No, I am not saying that. I am saying that one of the things that would be irrelevant when making a decision about a procurement process would be that you did not like the reports that they wrote.

Q168 Chair: And who would challenge that?

Stephen Hughes: The auditors themselves would be able to challenge that through judicial review if they wished.

Joanna Simons: I support many of the things that Stephen has said. Another issue, which is something that is not included in the Bill, is rotation of auditors. Personally, I do not think it is a good idea that there could be unlimited extensions, because that potentially allows for too cosy a relationship, and not enough challenge. One of the checks and balances in the system at the moment is in fact that five-year rotation. Currently we have the chance for a bit of an extension, but personally, and I think many of my colleagues will say the same, I believe that it is a fundamentally sound thing that there should be a rotation.

I recently chaired the board of governors of one of our local universities, which appoints its own auditors. Having that rigour of rotation is very sensible. I think that provides a very strong check and balance.

The other thing to be conscious of is that we are in a very transparent era. We cannot move for freedom of information requests on everything we do. The press have a powerful part to play. I understand that you have a concern where there is an authority that is a single party. There are not that many of them. Certainly the vast majority of councillors are not in that position. Opposition members do put a challenge in. Clearly you have to think about all the potentials, but I do think that rotation is something that could be included, and that would put a very strong check and balance in. These are major firms, after all, that are qualified in terms of audit. As for the likes of KPMG and others, if they lose one bit of business, they will get another, but it would be better if they rotated anyway.

Q169 Mr Betts: It is not just about appointments. It is about whether they are prepared to be really critical and whether they have the confidence to stand up not just in authorities where there is only one party but where there are very powerful individuals who want to put pressure on and try to exert influence. Let’s think of Westminster a few years ago. Do you honestly believe that an auditor appointed by Westminster-without any external backing or support-would have carried out the forensic, detailed and long-running inquiry into what was going on there?

Joanna Simons: You are taking out of context one example from more than 20 years ago in Westminster that undermines the rest of local government. If you look at the number of local authorities that there are in the country, very occasionally there has been a bad apple. I would point back to Westminster. I was not working at Westminster, but I like to hope that if I had been there at the time-if I had been chief executive-I would have followed the statutory whistleblowing role that I have personally, as do my section 151 officer and my monitoring officer. We are professionals within this. With all due respect to you politicians, we do have a whistleblowing role, and on occasion different colleagues around the country have used it if there has been a problem like that. There is a danger that you undermine the professionalism and the credibility of the staff working in local government.

Q170 Mr Betts: I was not; I was simply saying that surely the audit process is a further check. Of course, the professionals directly employed are there. Westminster was one example 20 years ago, but surely we have to have a system that is robust enough to deal with such an example if it occurs again.

Joanna Simons: But we are in a world that is much more regulated than it was 20 years ago. There is much more transparency and more openness than there was 20 years ago, out of all comparison to the situation there.

Q171 Chair: You two are here because you are exemplary local authorities. Some of us think about some of the local authorities we come across. I have a 100% council, and it is very difficult, in that structure, to find real, objective assessment that is not politically controlled.

Carolyn Downs: Among principal councils, there has only been one report issued in the public interest since 2010, and that was in Wirral council. That was a council where, as the body responsible for sector-led improvement, we were already engaged, and we worked with the auditor on that very same report. To put it in context, in a principal authority, there has only been one report in the public interest in the last two years.

Q172 Chair: Mr Parkinson has not had a chance to say what his proposition is. You are talking about a sector-led body, aren’t you?

Steve Parkinson: Thank you very much, Chairman. Yes, the proposal from the Society of Local Council Clerks and the National Association of Local Councils is very much about having a central body, although we have tried to avoid using the word "central". It is certainly not about recreating the Audit Commission; the idea is to have a procurement body.

I could reiterate the comments about independent members. Obviously, from the principal authorities’ point of view, there are perhaps 800 larger authorities which might be appointing audit panels. For 10,000-plus smaller bodies, if they could get one extra volunteer, I am sure they could find far better things for that volunteer to do than simply sit and help appoint an auditor.

In addition, the proposal is that, by having one body, you have one person writing a standard contract and one person supervising a procurement process, and you have the economies of scale. But a parish council, perhaps with a turnover of £50,000 to £100,000, is going to struggle to get an appointed auditor at a reasonable cost.

The idea is not to recreate the Audit Commission, but as a procurement mechanism, a body that is owned and operated by the local partners gives us localist control. It also gives independence, because out of the 10,000 parish and town councils, there is only going to be, perhaps, a board of 10 people managing the organisation. That gives a kind of distance so that the body is not directly involved in the process.

In terms of the gaps that produces, the real risk, certainly for the smaller bodies sector, is that if anybody opts out and chooses to do their own thing, there is no central list or way of making sure who has actually submitted their returns and who hasn’t. There is a danger that, in separating things and taking a localist approach, you end up with people falling through the gaps, and unless somebody in the local community picks that up and says, "Actually, I’ve noticed my council hasn’t been audited for the last five years," it is quite possible that that will happen.

Q173 Mr Bacon: And there is no systematic way of picking that up.

Steve Parkinson: If the body we have proposed setting up actually did appoint for everybody below the £6.5 million threshold, or whatever the threshold turns out to be, it would clearly be operating on behalf of them. But we have put forward an opt-out clause so that if people decided that they could undertake the exercise for themselves, they are at liberty to do so. I would have to say that the council I work for turns over something like £700,000 a year, but looking at our audit fees, you would be asking me to carry out a complete procurement exercise for about £160 if I was going to save money, and that is quite unrealistic in terms of the time I would take to write an audit spec, which I have never done before, and which I would hope never actually to have to write.

Q174 Heather Wheeler: I am a vice-president of the LGA, so I had better get that on the record. I used to be a parish councillor, and I seem to recall that when our parish council had its audited accounts and in-house audited accounts, we lodged them with the district council every year. Whether that was best practice or we were meant to do that, I do not know, but I am sure that we lodged them with the district council.

Steve Parkinson: That was the process until about 2002, when the lighter touch audit was brought in. Generally, the auditor who was dealing with the district council would also operate on that basis, and they would see the entire set of books. The current system is that there is a very standard form, where the accounts are completed, and there is a collection of declarations made by the council. It is signed by the responsible officer of the council to show that the accounts are right, it is approved by the council to be submitted for audit and it is signed by the internal auditor-all parish and town councils should have an internal auditor who is reporting to the council on any weaknesses in their governance. It then goes to the appointed auditor, who takes a very high-level overview of whether there is anything in the accounts they are unhappy with, and, each year, they ask for a selection of information to support the accounts they are seeing, just to give them a flavour of whether everything is operating smoothly. That is how the lighter touch regime operates on a considerably cheaper basis than having an auditor sat there going through everybody’s books individually.

Q175 Chair: We have a lot to get through, but I want to get a yes or a no from both Joanna Simons and Steve. Do you accept Carolyn Downs’ proposition that there ought to be a joint-purchasing entity?

Stephen Hughes: For Birmingham, we will go along with it if it is necessary. We can do our own procurement. We are a massive organisation.

Q176 Chair: So you are not really bothered. It is not major.

Stephen Hughes: No, but I can understand the issue for district councils and smaller councils, where there are some real benefits in having scale procurement. More likely, if we had the freedom, we would put out a framework agreement and invite other people to come along, but we have the capacity to do our own procurement without any difficulty.

Joanna Simons: We are in a similar position. We could certainly offer a framework to our district colleagues. That is one of the things where there is a gap in that overview. It is the same with the health service. Certainly, anything that keeps procurement costs down has got to be sensible. One of the good things in the past few years has been the downward pressure on audit fees. We are all concerned in today’s environment about seeing money going up in that when there are an awful lot of other things to worry about.

Chair: I am going to move to Meg on benchmarking.

Q177 Meg Hillier: One of the interesting discussions that we have been having is about the role of the NAO in this new structure. If the NAO will not be identifying improvement areas, how will the LGA identify areas for improvement? You have some tools, but could you outline your approach?

Carolyn Downs: If I could clarify the issue where we have concerns about the role of the NAO, it is on the drafting of the Bill at the moment and what is meant by the word "improvement". From the fact that the NAO will be doing studies and thematic studies in local government, we would hope that it will consult with the LGA and therefore the sector on what the content of those studies might be. We would have some serious concerns if there was any mission creep that put the NAO into the whole role of sector-led improvement, which has clearly been pushed to the LGA and the sector to take forward. We do not have an issue about a small number of studies that the NAO will conduct each year; we are more concerned about the NAO moving into the wider improvement agenda and working directly with councils, rather than looking at the systematic approach that CLG should take to ensure that the system is in place to give assurance through the accounting officer to Parliament.

Q178 Meg Hillier: Ok. If we talk about self-regulation and the sector-led improvement approach that you are suggesting, you have this LG Inform, which is part of that. How much does LG Inform currently cost and how you will fund that work in the future? It would be helpful to know.

Carolyn Downs: I am really sorry, but I do not have the cost. I can provide that to the Committee, as well as its future costs. We have put together LG Inform and most of it is brought through data that is available through councils and other inspection regimes. It pulls it all together as benchmarking data, which can be manipulated by the council and other councils. That will go public and be available to the public in probably spring or summer next year, once the IT platform is available. That will be a publicly available tool.

Q179 Meg Hillier: Just on the data first of all. How are you ensuring that local authorities collect data in the same way? Once the national audit is gone, there may not be the same drive to have standardised data. Is that something that you are asking people to comply with voluntarily?

Carolyn Downs: Yes, absolutely. In many respects, some of that data is still collected in a standard format.

Q180 Meg Hillier: There is no requirement for that to happen in future.

Carolyn Downs: I do not know whether there are statutory requirements, but a lot of that data will come from DfE data, so that will be done in a certain format. Others will be done through Health. There are various bodies to which we report as local government. There are some that are completely standard, but for others we ask for people to provide the information in a certain way. We do not require them, but I am not aware of anyone who is not prepared to.

Q181 Meg Hillier: So what is the sanction if a local authority-say Birmingham or Leeds-takes off in a different direction?

Carolyn Downs: There is no sanction.

Q182 Chair: How many local authorities are not members of the LGA?

Carolyn Downs: Two.

Chair: Only two.

Q183 Meg Hillier: What size are they? Are they district?

Carolyn Downs: One is the London borough of Bromley, and the other is Slough.

Q184 Chair: How many get involved in all your peer review stuff? What proportion is it? It is only 20% or something, or am I wrong about that?

Carolyn Downs: I do not know exactly what the percentage is.

Chair: It is tiny.

Q185 Meg Hillier: We need to unpick this. LG Inform is one of your ways of doing some benchmarking. Only 300 so far are involved in LG Inform.

Carolyn Downs: That is right.

Q186 Meg Hillier: What is the roll-out plan, and is there any compulsion?

Carolyn Downs: We have no compulsion. This is entirely down to individual councils.

Q187 Meg Hillier: Do you have a feel for whether this will be taken up across the board?

Carolyn Downs: We hope that we will get to a much larger number. The large councils will all be involved in LG Inform. The smaller district councils will be where there is a gap.

Q188 Meg Hillier: Can I go back to the cost? What is the cost for a local authority to join up to LG Inform?

Carolyn Downs: It is part of our free offer. There is no financial barrier.

Q189 Meg Hillier: But there is a time cost in putting across the information?

Carolyn Downs: We load all the information into it. It is down to councils to be able to manipulate that information. We actually provide that entirely.

Q190 Meg Hillier: So actually it could be a useful tool for small authorities-

Carolyn Downs: We do not do it for town and parish councils.

Q191 Meg Hillier: Not town and parish councils, but it could be useful for the smaller districts.

Carolyn Downs: Yes, it should be. Many use it very actively. Backbenchers use it. In terms of holding the council and its performance to account, it provides a useful tool for backbenchers to do that independently.

Q192 Meg Hillier: That brings me on to two things. Picking up on the numbers issue, is there a point at which if you drop below a certain number of authorities being involved in LG Inform it becomes a less useful tool? Have you an idea of what you want as the ideal number of local authorities?

Carolyn Downs: To be honest, we believe that all councils should be involved in it. If it went below about 250, it would start becoming less useful. That is a personal view.

Q193 Chair: I do not know what 300 is as a percentage.

Carolyn Downs: There are 340. Over 95% of councils are using LG Inform.

Q194 Meg Hillier: Then there is how this information is accessible. You talk about it going on a public platform. We hear that all the time. We on the Public Accounts Committee are quite in favour of open data and what the Government are trying to do on that. Frankly, though, half the time it is a load of data dumped on the internet. Even if you have some financial skills, it would be very hard to follow the pound.

Carolyn Downs: It is so good. I regularly use it when I visit councils. If I was going into a council, it would do the peer challenge of the council. It will tell me where it has high costs, high performance and low costs, high performance. It will tell you exactly whether they are bottom or top quartile cost and where its performance sits with that.

Q195 Meg Hillier: Perhaps Joanna, Stephen or you could give an example of a service area where you could go in and what sort of data you would find-perhaps it would be child care or social services costs?

Carolyn Downs: Yes, you would be able to find out about adult social care, whether a council is in the top 5% cost, whether its outcomes are in the top 5% or whether indeed they are in the bottom 5%. I was personally involved in a peer challenge of a very large county council recently, and that was precisely the information that we used to challenge it about its procurement and its costs as a council and whether it was driving its costs down in the way that other councils were able to because it was high cost, but its performance was the same as others.

Q196 Meg Hillier: Okay, may I touch on the issue of how robust and rigorous this is because it is voluntary? When it is working, it is great, but there is a threshold at which it may work less well. In terms of ensuring that it is delivering results, your peer review process is all voluntary because members can opt out. Birmingham or Oxfordshire’s large councils could decide that it was not useful for them or that they were being unfairly criticised-notwithstanding what Ms Simons was saying about the proper professionalism of officers. We saw something similar with the housing association model when the big 15 sort of floated off from the national body. They operate very independently now and do things quite differently. Is that a risk? Perhaps Joanna Simons and Stephen Hughes have something to say about that.

Stephen Hughes: The data are incredibly useful just for our own purposes. Given the pressures on local authorities at the moment, a good starting point is to understand where you are relatively more expensive or relatively better than other authorities in order to ask those questions. We are using that information for that purpose.

Q197 Meg Hillier: Do you use LG Inform?

Stephen Hughes: I don’t know the answer to that. I have people who-

Q198 Meg Hillier: You have people who do it for you. [Laughter.] When I was just a brand new councillor, Stephen Hughes was a finance officer in Islington, so we have both moved on.

Joanna Simons, do you use LG Inform?

Joanna Simons: I have to say I’m not sure, but the county council has been in the benchmarking club for some time. We have been paying outside bodies. What we have recently decided is that migrating across to whatever comes next is the key thing. We are certainly very keen on benchmarking.

If I can take it back a bit to where the question seemed to start, which was around the studies and other things, for most of us the worry is about being inundated with endless requests for additional data for things that feel a long way away from our priorities. That was the problem with the Audit Commission; it just got out of control in terms of the latest idea that might be fine in x part of the country but wasn’t relevant for us.

What we are really looking for is stuff that, when it’s really core things, some national work that goes on that’s useful, but locally we need to work on our own issues. Anything we can do to get standardisation of performance data is important. It needs to be honed down to the key things.

With the business about benchmarking, there is no value to anyone if there isn’t a consistency in terms of the kind of information going in. That has always been the search for the holy grail. Whoever has done benchmarking, whether it is the Audit Commission or somebody else, it is about making sure that it’s apples with apples and pears with pears.

As with Stephen, an awful lot of our day job is the hunt for continued efficiencies. That will not go away, so we are going to need this data for the future.

Stephen Hughes: The other point that I wanted to make is that, given the transparency agenda if you like, admittedly maybe we are not presenting the information in the most useful form, but there is a mechanism through that to ensure that local authorities start producing information on a basis that can be used by anyone. To be honest, that route would be preferable to having a body coming to us and directing us as to what pieces of information to produce and not to produce. Some of the stuff that the Audit Commission did was really very good, but quite a lot of the studies they did were useless.

Q199 Mr Bacon: Do you mean the value for money studies?

Stephen Hughes: Yes.

Q200 Meg Hillier: In terms of the Bill, because the National Audit Office will have some role in overview and sometimes in Parliament we need to get that broad overview to a body that is accountable to us, do you think the Bill is drafted correctly at the moment, in limiting the NAO’s role to a certain area of work, such as six studies a year?

Joanna Simons: Having now read-in great detail-the Bill and the guidance notes, the wording of the Bill itself seemed pretty wide. The guidance bit that went with it at the front was actually more framed. If we are talking about something that was how the Audit Commission used to be donkey’s years ago, when it did a few things a year, when they landed on your desk-in those days, they did land on your desk-you had time to read them, you took notice and you took them to committee. I can remember doing that back in London at a housing committee and justifying why Hounslow’s approach to void properties didn’t match up with the ideal of the Audit Commission. It is scarred in my memory, from about 1990.

What happened latterly is that there were billions of reports that nobody ever read, because there were too many of them and they weren’t high quality. If we can get back to a few key things, then I think we’ll have some substance, but the worry is that it will just be whoever’s latest idea somewhere that just gets imposed on everybody, which will completely waste time and discredit things when we need focus on the things that matter.

Q201 Meg Hillier: So you are saying that the guidance is better drafted almost?

Joanna Simons: What I am saying is this-the guidance is kind of clearer and tighter, and that’s the thing that’s important, whereas the wording felt very wide.

Q202 Mark Pawsey: Can I just ask you about the evidence that you have given us about LG Inform as a method of monitoring the performance of one local authority against another, relating it to the current Communities and Local Government Committee inquiry into the role of the councillor? We have had back-bench councillors talk to us about what they do as councillors and what attracted them to the work, but none of them has ever told us about the ability that this measure provides them with, in terms of holding their council to account; that is the back-bench scrutiny role.

I had never heard of LG Inform either. How do you go about making certain that back benchers in councils know about it, because the LGA subscription is paid by the council? It is not a right available to the individual councillor. So how do we get this information more widely available, because there is no point in your doing all this stuff if every councillor doesn’t know about it. I say to you that in the local authority that I come from, nobody knows about it.

Carolyn Downs: Oh well, that’s useful feedback. Thank you, and I’ll obviously address it.

Chair: I agree with you, Mark.

Q203 Mr Betts: The point has been made about the role of the NAO being to go back to where the Audit Commission used to be in the halcyon days that we were talking about. One of the Select Committee recommendations in terms of value for money was: "The NAO and LGA should lead on devising a coherent programme that adequately covers priority topics and avoids undue overlap." Is that actually happening?

Carolyn Downs: I chair a reference panel in the NAO of officer colleagues from the sector, and we work with the NAO to choose the reviews that will be done. The next one, I think, will be on universal credit and its implementation and policy implications.

Q204 Chair: I will tell you my concern with all that. If local authorities determine what the NAO is going to do, you will hardly touch things. Universal credit is classic: it is not your responsibility yet, you can be critical of the Department for Work and Pensions and you can sit quite happily at the end of the report. What we want, in following the taxpayer’s pound, is to get assurance that the hard subjects are tackled. How are you deal with housing repairs, for example? I am trying to think of big things, top things.

Carolyn Downs: The second topic to be done is adult social care, which is by far the largest proportion of spending in local authorities.

Q205 Chair: But there again-I can see where you are coming from, it will be a plea for greater resources from Government to fund local authorities. We want to get underneath, which is why I am slightly suspicious-I love local government but I am slightly suspicious-of a voluntary peer mechanism that is entirely led by local government.

Carolyn Downs: It is not entirely led. I chair a reference panel. It is entirely the choice of the NAO. So if you feel that it is making inappropriate choices, that is an issue for you to raise with the NAO. We say to the NAO that these are the issues that we feel are critical in our areas at the moment. Adult social care is nationally accepted as a priority issue that needs addressing-

Q206 Chair: For Government rather than local government.

I do not know what we do when you have got a sector-led approach and you do a peer-led review but three councils refuse to publish.

Carolyn Downs: All councils have now agreed to publish-

Q207 Chair: What, Richmondshire, North Devon and Hambleton have published those peer reviews?

Carolyn Downs: To be absolutely honest, the reason why Richmondshire did not is that it was a joint council, with a shared chief executive and a joint review, and the whole arrangement had fallen apart when they would have undertaken the publication of the review. Anyway, it has now been published. Just to let you know, the one council that has caused more concern than any other-Wirral council-had its peer challenge last week and today it is publishing the review and its outcome. So we have really moved on considerably in terms of the whole issue of transparency around peer challenge. When I started at the LGA a year ago, I would say that there was some really deep cynicism about sector-led improvement in the sector itself. I think that has moved on considerably and tremendously, and the work that we have done in the Wirral has been exemplary. The fact is that it had its review last week, all three party leaders in the council agreed to the recommendations and to work on and publish them and today that review is being published.

Q208 Heather Wheeler: I used to undertake IDA peer reviews and thoroughly enjoyed it. It was the usual thing: you learned as much as you hoped to impart to the councils. I am interested and delighted to hear that it is now general business to publicly report them, because I do not think we did all those years ago, so things have changed. With the smaller councils, is there any cost-effective way other than benchmarking? Do town councils benchmark with each other? Do parishes benchmark with each other?

Steve Parkinson: There are certainly some that do. For those that were in the Best Value 41 group, before parish councils ceased to be Best Value councils, benchmarking was very much something they did. The biggest problem is that if you look at two district councils or two county councils, they have a very similar level of functions-they have some options and they have different sizes-but if you look at two parishes of identical size, you might find for example that one had a cemetery and the other did not, one had a leisure centre and the other did not, one had playing fields and the other did not, or a market for instance. It really is apples and pears, with some bananas thrown in with such circumstances.

Q209 Heather Wheeler: Especially if there was a market.

Steve Parkinson: Exactly. I would say, from our perspective, in the 11 years I have been in the sector-I have been in the parish council sector for 11 years, I have been in local government for 25-we have seen huge changes to how things are done, and that has all come from the sector-led bodies, from the national association, the county associations and the society bringing together the professionals and looking at the very often difficult questions.

Q210 Heather Wheeler: So how do you feel the Bill affects governance and transparency for small accountants? As Madam Chairman says, we are here to find out whether there are issues where the Bill needs tweaking or whether certain paragraphs need taking out, because they do or don’t affect you, or because they do or don’t make it better.

Steve Parkinson: I cannot see the impact on them-in terms of the National Audit Office, in looking at what they would get from parish councils’ accounts, it would be very hard to do any kind of study on that and come up with useful information. I think if you are moving down to transparency, clearly if we are having a lighter-touch regime in that sense, it makes a huge amount of sense that information is published by parish councils. There is certainly a steady move towards people publishing information on websites, but I do not think that that is the be-all and end-all. If you take a very small parish of perhaps 300 people, actually they are much more likely to walk past the parish noticeboard next to the shop than they are to go online, thinking, "Oh, let’s have a look at the parish council website and see what they are doing." At the very local level, sometimes a local and physical solution works. In terms of what is there, it seems about right for our sector at the moment.

Q211 Mr Bacon: I wanted to ask about specific cases where-I don’t know if you are aware of this-a local authority has requested the removal of an auditor because that local authority was concerned about the potential for the results of the audit reflecting unfavourably on it.

Joanna Simons: I am not aware of anything like that.

Carolyn Downs: I am aware that there was one, and I think it was referred to in your last hearing with the previous-

Q212 Mr Bacon: Can you just remind us which one that was?

Carolyn Downs: I don’t know which one it was. I just know that it was referred to in your last hearing.

Steve Parkinson: If I can respond from the smaller bodies’ perspective, I am not aware of anybody who has asked for the removal of their auditor, but certainly, if you take a small council, a common complaint is that a member of the public has complained about something relatively small and the audit bill has run to several thousand pounds more. If you take a medium-sized council, their fee might be £500 for a standard audit fee, and they then might get a £4,000 or £5,000 bill, because a lot of work has been done to investigate that complaint. There needs to be a lot more proportionality in the auditor’s response to investigating those types of things.

Q213 Mr Bacon: The same is true sometimes of legal fees that are incurred by local authorities. I have seen that in my own area. What about whistleblowers? Do you think that they are sufficiently protected under the draft Bill?

Carolyn Downs: There is general statutory protection for whistleblowers, and there are various ways in which whistleblowers can take their issues forward. Certainly when I was a chief executive-I am sure my chief executive colleagues will have procedures in place, whereby the chief executive is the depository of whistleblowers’ complaints. Every chief executive will take those whistleblowing complaints extremely seriously.

Q214 Chair: Do you two get complaints?

Joanna Simons: Yes, periodically.

Q215 Chair: Periodically? Often?

Stephen Hughes: Quite a few, yes.

Q216 Chair: So the system works.

Carolyn Downs: It does work, yes.

Joanna Simons: They will come in to the chief lawyer. They will come in to the chief internal auditor. Sometimes they will come in through members and opposition members.

Carolyn Downs: Or MPs, even. They will come in from newspapers. There are all kinds of mechanisms for whistleblowers to use. Let’s remember that the issues that were raised in the Wirral were raised not by the auditor, but by a whistleblower. The statutory officers have a statutory whistleblowing role as well, and most statutory officers-in fact, I do not know of a single one who does not take that extremely seriously. So there are protections.

There is an issue, however, about the whistleblower going to the auditor-ensuring that one knows who the auditor is. We need to make sure in the future that the public know who the auditor is, so that whistleblowers have a mechanism for going to the auditor. I think that is really important.

One of the gaps I was going to raise was that so much of this Bill is reliant upon the regulation that sits behind it. We will be extremely interested to look at the regulation that sits behind the Bill. In terms of the issue about the removal of auditors and whether there is any process of appeal etc., all of that needs to be properly covered in the regulation that sits behind the Bill to ensure that there are the appropriate assurances for local people, for yourselves as MPs and for councils.

Q217 Mr Bacon: One of the things that you said slightly surprises me, and it came up in a tangential way last week as well. Is it difficult to find out who the auditor is of a local authority?

Carolyn Downs: No, of course not.

Q218 Mr Bacon: Is it always available in a clear and easy-to-find space on the website of each local authority?

Joanna Simons: It will be on the authority’s website and in the accounts, which are published. I am pretty sure that everyone has a search engine on their website, so if you put in "auditor", it should come up.

Stephen Hughes: They can always just ask us.

Carolyn Downs: I thought that bit in the reading last week was a little bizarre.

Q219 Mr Bacon: You said that we must make sure the public know who they are.

Carolyn Downs: You must make sure. I read that in your transcript last week, and there was a discussion about whether it was public information. Of course it is public information.

Q220 Chair: I accept that whistleblowers are few and far between, but the great thing about the Westminster case, which we touched on-I know it was a long time ago and things have got brilliantly better since then-was that if the Audit Commission had not stood behind what was a private district auditor, the question is whether the case would have been pursued. The risk of millions having access to his private audit form might put him off.

Joanna Simons: If we had a required rotation, even with that risk, the companies will be major organisations, and their specialists will not be some titchy little accountancy firm auditing a billion-pound business. It will be the likes of major accountancy firms. Even if they lost a contract, it would be only one and for the remainder of five years. If we had a rotation requirement, the risk would be pretty minimal in the scheme of things.

Q221 Mr Bacon: Do you mean because what they lost on the swings they would gain on the roundabouts in a cosy oligopoly?

Q222 Chair: I don’t think a partner in any of the major accountancy firms-I must say this, having worked for one of them-would allow you to risk £2 million or £3 million just to pursue public interest.

Joanna Simons: It should not be as much as that. Our audit fee this year is £250,000.

Q223 Chair: No, no. This is if you do a complex report in the public interest-

Q224 Mr Bacon: If you have to do some forensics.

Q225 Chair: Even at the time-it was a long time ago-it cost a couple of million.

Q226 Meg Hillier: Could I ask the two chief execs whether they have a contingency for this-or would they under the Bill-to pay for a public interest audit?

Joanna Simons: One of the big issues that people get frenziedly interested in is the fact that local authorities have certain reserves. We have a clear formula for those, but certainly if larger authorities had to make provision for that, they would be able to do so.

Stephen Hughes: The auditor would charge the fees back to the council.

Q227 Chair: I know, but just think it through. In comes the auditor and says that a report is required in the public interest on the way you have been handing contracts to X. He starts investigating, quickly builds up a bill for a million quid, and you will say, "Thanks very much, we’ll cover that," and reappoint the auditor.

Stephen Hughes: No, of course we would not be happy about that, although it would depend on the extent to which the authority was wrong about what was going on. The fundamental issue is that if the auditors, when fulfilling their public duties as set out, find something, they are under an obligation to pursue it. They would be in dereliction of their own duty and professional standards if they did not. That is the challenge.

An entirely different case is Enron. Ultimately, the auditors found a problem sufficiently large that it broke the company and caused a complete change in accounting regulations. International accounting standards changed as a result of that case. Auditors acting without fear or favour is what you expect.

Carolyn Downs: In the case of Wirral council, we were working with it when its report in the public interest was issued last year. We were obviously having conversations with the Audit Commission in advance of that. The council has behaved in an exemplary fashion with publication of the report, and has taken the appropriate action. I anticipate that most councils would do so. We take sector-led improvement really seriously. We took that report in the pubic interest very seriously, and worked with the council on it. There are sufficient checks and balances. Local MPs in the Wirral have been very involved in the work that has been done in that council to take forward improvements, so there are huge amounts of checks and balances in the system. I understand your concern, but I think it is important, and there is always one case that proves the point, that we understand that, actually, the overwhelming majority of councils are behaving properly.

Q228 Chair: I am going to bring Mark in, but I just want to ask one more thing. There is now an increasing trend towards shared services. How do you see that being dealt with in the framework?

Stephen Hughes: Shared services are not much different from outsourced services. You have the same sets of risks and balances.

Q229 Chair: You have a lead authority.

Stephen Hughes: Well, you might go through a lead authority, or you might look at how the transactions are effected according to the individual component parts. So I do not think it is anything special or different that requires a different kind of legislation.

Joanna Simons: I would echo that. We have a number of different types of shared service arrangements with other authorities and other places. It will just be a question of what makes the most sense in that particular instance.

Q230 Mr Betts: As well as having joint commissioning, which we talked about, for managing county districts or different districts together to try to build up some capacity, is it possible to have joint audit committees, too?

Joanna Simons: Yes, that is possible.

Q231 Mr Betts: That would help with the problem of recruiting independence because you would have fewer bodies to recruit people to.

Joanna Simons: If you want to go down that line, that is possible, but one of my worries would be about what is proportional and what are the costs. If the issue is about the independence of procurement, it would make more sense to have some bigger framework contracts one way or another, whether it is the LGA doing it or, in bigger met areas or county areas, the upper-tier authority doing it on behalf of others. We want to try to keep the costs down, but certainly when we do joint things such as joint health scrutiny, it is a question of balance, not putting in too much bureaucracy and getting better value for money.

Q232 Mark Pawsey: I want to ask about the cost and quality of audit under the new regime. We heard evidence last week that the Audit Commission had done a fantastic deal and that the prices that are currently being paid are unlikely to be repeated. Presumably your opinion is that you can go out and do a very good deal, but, Steve, you represent lots of smaller bodies that are going to be concerned. So what is going to happen on cost? Perhaps you could also tell us what your views are on quality. If there are these highly competitive tenders for work, does that mean that audit is going to be done less thoroughly in the future than it might have been done in the past?

Stephen Hughes: Clearly we are a large authority, and we will probably get a keen price in the future any way. In fact, there is an argument that says that, if we had done our own separate procurement, we might have got an even better deal than the one in front of us. There is that risk that larger authorities are likely to get much better deals than smaller ones.

What we have noticed so far is a keenness to charge more regularly for stuff that is over and above what was in the standard contract. So there is already a new commercialism in the nature of the relationships.

Q233 Mark Pawsey: So are audit firms coming in at a loss on the main job and then making it up with extras?

Stephen Hughes: No. I am not saying that, but if we had not made up a set of notes to the accounts in an appropriate way, the auditor would say, "Well, that is going to take us another day’s work. Here’s the bill." So they are being a bit sharper in what they are charging for and what they are accepting in terms of the standard stuff. Now that we know they are working in that way, we can work with it. In the long run, I think it is all going to be supply and demand, isn’t it? We know what the demand for auditors is. If we can increase the supply, and therefore keep the market competitive, prices will stay keen. If, on the other hand, it becomes a smaller number of large authorities-

Q234 Mark Pawsey: All right. What do you think is going to happen?

Stephen Hughes: I do not know yet, because I do not know what is going to happen to the market. There is a risk that people have bid for what they have bid for to get into the market with a view that there will then be a limited number of players in the next round and that they will be able to charge more.

Q235 Mark Pawsey: I take it from what you said earlier that you are very happy for your power in the market to be used to the advantage of districts and smaller authorities nearby.

Stephen Hughes: We are willing to do that if they are willing to. There is a bit of a danger that everybody thinks that, if we do that, Birmingham is taking over the world, so to speak.

Q236 Mark Pawsey: In which case, Steve, does that give you some comfort in terms of your anxieties about the fact that smaller authorities are likely to be, in isolation, charged a lot more than they are paying currently?

Steve Parkinson: There is a risk of that. Certainly, if parish and town councils were going through their own auditors-if you look at the bottom end there are now 4,300 under the new fee arrangement that will pay no fee at all because they are a council spending under £10,000. But the next band up-up to £25,000-their audit fee is £100. That is a small amount of an auditor’s time to be cost-effective. Realistically, if they were going to try and go to the market and say, "We’d like an audit done", they would be doing well to get that.

Q237 Mark Pawsey: So is it just going to be superficial? Is it so superficial that it is not worth doing, in your view?

Steve Parkinson: I cannot help feeling, looking at the figures we have got, that my own council will probably see something like a 20% reduction from the audit fee we have just paid to the audit fee next year under the existing regime. Those bodies at the bottom are going to-

Q238 Mark Pawsey: What would be the impact on quality of that?

Steve Parkinson: That is hard to say. I have heard an anecdotal comment. Somebody told me that their audit had been done by a graduate student who was not doing accountancy-they were doing economics or something. I do not know whether that is factually correct. But that is the kind of concern. You might get the most junior person you can find to do a quick once-over and send the forms back. There are certainly councils that think they are paying a big fee for a signature. They are convinced that they send the accounts in, the accounts sit somewhere for a month, then eventually get signed and sent back. I am sure that that is not what happens, from the auditor’s point of view.

Looking at the current fee scales for this year, which the Audit Commission has just published, the savings that could have been squeezed out of the market look as though they have already been squeezed out. When we get to the 2017 tender exercise, I cannot imagine those fees going down and, especially for the very smallest, I can see them needing to go up.

Joanna Simons: Can I just add a relevant point? It is unclear what will happen in the next procurement round, and to extensions. We will need some certainty about that, sooner rather than later, obviously.

On the quality of the accounts, some of it is also about how good you are internally. Our audit fee has gone down over the last 10 years as we have got better at doing our accounts.

Q239 Mark Pawsey: Because you prepare more information.

Joanna Simons: Absolutely. It is in our interest to be better ourselves, because that keeps the costs down. There is a different issue for small councils, which is that if you can procure on a wider basis, by whatever route, that makes a difference.

Q240 Chair: Okay. We are coming to the end. I have a couple of questions I want to pull together, and then Richard has one. Going back to the NAO, is there anything that you would not want the NAO to get involved in, in your local authorities? What would you not want them to do?

Carolyn Downs: I do not think councils would want the NAO to be involved with individual inspections of work in individual councils in any way, shape or form.

Q241 Chair: Would you expect the NAO, at all, to be involved in discussions with individual councils at any point?

Carolyn Downs: If they were following the money, which is a decreasing amount of central Government money as we go forward, we would expect them to have conversations to understand what happens with the money in an individual council. But the accountability to the NAO is from Bob Kerslake, as accounting officer in the Department for Communities and Local Government.

Councils are clear that their accountability is to their local community.

Q242 Chair: Do you all agree with that?

Joanna Simons: Absolutely. The issue with the NAO is really what I said earlier about what happened with the Audit Commission. If this is at the level of doing core things that make a difference in value for money, that is fine. We do not want this to be drowning in the latest thing that somebody thinks is right, but is not right across the piece.

Q243 Chair: Finally, Carolyn, we stopped you at the beginning, but, very quickly, are there any other gaps?

Carolyn Downs: On the cost issue, it is not just parish and town councils where there is a real risk of increased costs; it is also smaller councils-district councils and some of the smaller unitaries. In the next procurement round, having squeezed 40% out this time round, there is a real need to do as much collective purchasing as we can to ensure that we get the best prices.

The other gap is the role and powers of the residual body, which are not referred to in the Bill as it is at the moment. I think we will, as John said, have some real interest in what the role and powers of that residual body are, through to 2017, particularly if those contracts are then extended-and what the requirements are for those to be extended right through to 2020.

Q244 Mr Bacon: Is the assumption that the body can just be made by order at the moment, under the present proposals?

Carolyn Downs: Yes.

Q245 Mr Bacon: So there is no need, they would say, for being specific, because it can be dealt with by regulation. Is that the stance?

Carolyn Downs: Yes. That is why I said to you earlier that the whole issue of what the regulations are, sitting behind the Bill, is so fundamentally important to us.

Q246 Mr Bacon: En passant, my impression is that the NAO is no more keen to see lots of individual studies of individual councils than you are to have them done. You are probably singing from the same hymn sheet there.

This is really one for Mr Hughes: it seems a shame for you to come all the way from Birmingham and not have an opportunity to refute this scandalous story in The Sun. It talks about Birmingham city council having an £11 million automated phone service that is sending callers mad because it cannot understand Brummie accents. Apparently, it demands an account reference number, but cannot cope with numbers such as five, seven and nine pronounced in the dialect of the second city. Birmingham-born Josh Rickard, 34, a sales assistant, said, "I even tried to give it my plummiest posh voice but it didn’t make any difference." One of your councillors, Councillor Mike Leddy, said, "I am a proud Brummie and most people can understand me", but, "it kept saying ‘can you please repeat’." Is this true?

Stephen Hughes: There are two parts to it. There is a front end, which gives you options for choices, but you do not have to speak-you can press the keypad.

Chair: Is "dialect" a choice?

Q247 Mr Bacon: Apparently, it speaks with a Geordie accent. Is that right?

Stephen Hughes: I do not know. I have not rung it up.

There is a proposition we have not implemented about attempting to have an intelligent conversation with the person ringing in-the customer-to deal with the query or direct them to the right place. The reason we have not implemented it is partly to do with those kinds of issues and partly to do with ensuring that the systems are all properly integrated and that it actually works on a big scale.

Q248 Mr Bacon: When you say "those kinds of issues", you mean that it is true that it cannot understand the accent?

Stephen Hughes: I do not recognise the story as written. Is that today’s copy of The Sun?

Q249 Mr Bacon: It is today’s copy of The Sun, which says, "council deputy leader Ian Ward" confessed-he could have been confessing to something completely different; it is, after all, a newspaper, so only 50% of what you read is likely to be true, and the trouble is working out which 50%-"Our performance is a long way short".

Stephen Hughes: That sounds like half a quote, to be honest. I will have to ask him-

Q250 Mr Bacon: Unfortunately, they did not print the other half.

Stephen Hughes: There is always room for improvement in call centres, I would say. I will have to follow that up.

Q251 Mr Bacon: It is on page 17.

Stephen Hughes: Okay.

Chair: Thank you very much indeed for attending today. Many thanks for the very clear evidence.

Examination of Witnesses

Witnesses: Dr David Bennett, Chief Executive, Monitor, Richard Douglas, Director General of Policy, Strategy and Finance, the Department of Health, Sir Robert Naylor, Chief Executive of University College London Hospitals NHS Foundation Trust and Professor Peter C Smith, Imperial College gave evidence.

Q252 Chair: Welcome everybody. David Bennett told us that he would be a little late, so we will start without him. I am grateful to the rest of you for agreeing to come. We have about an hour. Our job is to look at the Local Audit Bill, as it stands, to see ways in which we would want to amend or augment it. We are asking our questions on that basis.

I shall start with you, Richard Douglas, with my Public Accounts Committee hat partly on. You have promised-we were trying to think on how many occasions-that the accountability protocols for the new health service, whether foundation trusts or the commissioning bodies, would be apparent by the time the Local Audit Bill emerged. There is absolutely nothing on the face of the Bill that tells us anything about how we will be able to follow the taxpayers’ pound and ensure value for money and probity.

Richard Douglas: First, may I apologise for the fact that the proposals around health have not been made public before this hearing today? We have been through a long period of consultation and discussion with the NAO, Monitor, the Treasury and the Commissioning Board, but that is no excuse-this should have been made public before the Committee met. The proposals are currently with the Home Affairs Committee for cross-government clearance, which will be by 19 November-but it should have been available before today.

Mr Bacon: You are talking about the Cabinet Committee, not the Select Committee of the House.

Richard Douglas: Yes, sorry, the Cabinet Committee.

Q253 Chair: It is deeply irritating, particularly because this is not the first time we have asked for it-we think it is the third time we have asked for it, from the Public Accounts Committee perspective. What, if anything, can you share with us that will give us satisfaction-I am sure Valerie will want to come in on health-that there will be adequate protocols and procedures in place for value and probity?

Richard Douglas: I can share with you the principles on which we based the proposals for the audit arrangements, and those areas on which there has been debate around whether they should be precisely in line with the arrangements set out in the Local Audit Bill or those on which there might be some modification. The basic principle that we have worked to is that we should follow the approach in the Local Audit Bill and that, as far as possible, we should mirror that in the arrangements for the code of audit practice, for the quality assurance and regulation of audit, for the scope of the audit and for the issues about appointment of auditors-so, as far as possible, to follow what is in the Local Audit Bill.

We have had some debate on two or three areas, because the arrangements are already in place for the NHS. First, on the code of audit practice, the proposal in the draft Local Audit Bill is that the NAO should be responsible for the code of audit practice that governs audit across local public services. At the moment, the code of audit practice for foundation trusts is a responsibility of Monitor. The debate has been about the extent to which we should mirror the principles and the rest in the Local Audit Bill-have the NAO to do a code for every body-or the extent to which we should have the NAO to do a code of audit practice to cover clinical commissioning groups, while Monitor continues to do it for foundation trusts.

On the regulation of audit and the overall oversight of auditors, I expect the proposals to be entirely in line with the Local Audit Bill, using the Financial Reporting Council and the professional accountancy supervisory bodies to oversee that.

On the scope of audit, we expect it to be the same in scope as the Local Audit arrangements, covering not only the audit of the financial statements but also regularity of audit, compliance with authorities and value-for-money audits. The only questions around that are potentially about what the reporting arrangements might be for each-what the precise form of reporting would be-but the basic principles are the same as in the Local Audit Bill.

Q254 Chair: Before we tease a bit of this out, when can we look at all this stuff?

Richard Douglas: By 19 November we expect this to have been cleared by the Cabinet Office, so on 19 November.

Q255 Chair: We have to report before Christmas, so we would want to have it pronto and then, if necessary, call you back if we feel that necessary.

Richard Douglas: Absolutely, I fully understand that, but 19 November is the date for clearance of this.

Q256 Chair: To tease out a little from what you said, it might be helpful now to bring in Robert Naylor. Also, thank you, David Bennett, for coming. Do feel free to comment.

We have had concerns, as David Bennett knows from the Public Accounts Committee, that at present it is not like local government-we had a little debate on this before we started-where there is a clear election system to pass judgment on an organisation if it fails to perform. We do not have that sort of democratic mandate. I know that there are elections, but they are of a very different nature, particularly in relation to foundation trusts. We have a concern about what mechanism should be in place, given that there is a complete vacuum in the Bill, in order to give the taxpayer assurance that there is both probity and value for money. I do not see, even from what Richard Douglas was able to tell us earlier, that the final arrangements will give us the assurance that we currently have in holding the Department of Health to account.

Dr Bennett: In terms of probity, the local audit is clearly very important. Foundation trusts appoint auditors-the governing bodies of foundation trusts appoint auditors, so it is an independent group that appoints them. We, of course, look at what the auditors say, as well as it being available to the governors and more widely. In terms of the overall performance, including value for money of the foundation trusts, that is our responsibility, so that is where-

Q257 Chair: Do you set an audit framework?

Dr Bennett: We do. We set the audit code for foundation trusts, so we define what it is that we want the auditors to look at.

Q258 Chair: So you can do the comparative study.

Dr Bennett: Absolutely.

Q259 Chair: Will you publish that?

Dr Bennett: The audit code?

Chair: No.

Dr Bennett: The audit itself? Yes. The audits get published.

Q260 Chair: Will you do some value-for-money studies, or do you expect the NAO to do those?

Dr Bennett: Across the system, we would expect the NAO to do that. In terms of individual trusts, looking at their efficiency, effectiveness and whether they are delivering their services economically is one of their current terms of authorisation. It will be in their licence going forward, and one of our jobs is to make sure that they are delivering on that requirement.

Q261 Chair: Can I just press you on that a little? When we did the financial sustainability of the trusts, I think you said-I can’t remember now-that there were something like 11 that would not.

Dr Bennett: There were then.

Q262 Chair: Is it worse?

Dr Bennett: It is 14 now.

Q263 Mr Bacon: That was only three weeks ago.

Dr Bennett: Not quite, but-

Q264 Chair: There are 14 that are either financially vulnerable now or that you would not have given foundation trust status to at this point. Again, I cannot remember which of those two statements is right. Is it the first or the second, or a bit of both?

Dr Bennett: In fairness, you would say both. The 14 are trusts that are in what we call significant breach of their terms of authorisation for reasons financial. By definition, were they performing like that at the point we were reviewing them for authorisation, we would not have authorised them.

Q265 Chair: There is a question arising out of that. We had the evidence last week from the ex-chair of the Audit Commission-I do not know if you had chance to look at that-who said that there has not been one report in the public interest coming out of foundation trusts. In local government at this point, if there was a local authority that was in any similar situation, the Audit Commission would have produced a report in the public interest. That makes us very uneasy about the proposed new arrangements.

Dr Bennett: I believe that is right. As a matter of fact, we have not been keeping a record of the PIRs, but as far as we are aware, there have not been any. We do not rely on the PIRs. The compliance regime we are operating, I would argue, is actually a more thorough review of what is going on in terms of the finances, and indeed, of other aspects of performance in the trusts, so it is us taking a view on the basis of the assessment that 14 of them are either in or heading for difficulty.

Q266 Chair: But there is no public interest report on that. So, Monitor-if you happened to be in front of the PAC or Valerie’s Committee, you might reveal that sort of information, but that is not the same as accountability to the public at large and a community.

Dr Bennett: Just to be clear, it is not only when I am in front of the Committees that this information becomes public. We publish it all the time. Every time we find a trust in significant breach in this category, that information is published by us. If things change at the trust, we publish that information. When we believe that a trust has dealt with its problems, we publish the fact that we are taking it out of significant breach. So it is very much in the public domain.

Q267 Valerie Vaz: Just to get this straight, you look at the foundation trusts and you have a dialogue and discussion with them, so there is not any mechanism that you are using to make them accountable to you. Presumably, they provide you with a certificate of compliance, do they?

Dr Bennett: The way it works is that we monitor an array of metrics, some financial, some around the quality of performance and some slightly broader around their governance performance. There is a systematic process of these metrics triggering our intervention and our intervention is on a series of escalations, so first, even when we spot that numbers are deteriorating before they formally trigger these, we will start conversations with them to understand what is going on. If they formally trigger one or more of these metrics, then we have a more formal discussion with them to understand what the nature of the problem is. If we think that there is indication that they are not completely on top of it and about to address it, the board is brought in for a discussion about what is going wrong. At that point, we almost certainly will choose to take some form of intervention action, sometimes requiring them to get some external advice and maybe to appoint new or additional members of their board-right the way through to us actually firing people on the board, if we think there is a serious problem with the leadership of the trust.

Q268 Valerie Vaz: But none of that is public.

Dr Bennett: Yes.

Q269 Valerie Vaz: They are all behind closed doors.

Dr Bennett: No. Well-

Q270 Valerie Vaz: Your discussions-

Dr Bennett: The meetings are not public, but the conclusions of those meetings are totally public, so once we have had a meeting we write to the trust saying, "This is what we have concluded on the basis of this meeting." That is partly so that they can have a period of time to respond. They may disagree with our reasoning. We provide a matrix of evidence that supports our conclusion. That is published, so it is also an opportunity for any member of the public to see what is going on with their trust.

Q271 Valerie Vaz: Presumably, this kind of framework will apply to each and every CCG-clinical commissioning group-and presumably to the NHS Commissioning Board. Is that right?

Richard Douglas: The CCG arrangements will be slightly different, in the sense that they are not regulated in the same way as foundation trusts are by Monitor. They will have the NHS Commissioning Board overall supervising, though. The NHS Commissioning Board will, first of all, set terms on which they will be authorised, which will include their arrangements around financial assurance and value for money. They will monitor them during the year. They will monitor compliance with those. At the extreme-

Q272 Mr Bacon: Sorry, who will? The board?

Richard Douglas: The NHS Commissioning Board will monitor those. There will also be separate external audit arrangements, in the same way I discussed earlier on, that comply with the principles based in the Bill. So there is a combination of external audit that gives assurance, but also the direct assurance from the Commissioning Board itself. The Commissioning Board is subject to assurance and review by the Department and to external audit by the National Audit Office.

Q273 Chair: Will any of these things, if the CCGs have financial difficulties, hit the public domain?

Richard Douglas: If the CCGs are in financial difficulty, yes, it would hit the public domain.

Q274 Chair: How?

Richard Douglas: It would hit it through the monitoring arrangements of the Commissioning Board-

Q275 Chair: So that would be public.

Richard Douglas: It would have to be elevated up to the Commissioning Board itself-whether there was a serious financial problem. The NHS Commissioning Board holds all its meetings in public.

Q276 Chair: And the NHS Commissioning Board would be under a duty to publish. At the moment, four PCTs are in financial difficulties. I am slightly going back into my memory and seem to recall that from the work we did.

Richard Douglas: Yes.

Q277 Chair: We know about it now. How will we know about it in the new world?

Richard Douglas: Again, as David said for monitoring foundation trusts, the information on the PCTs is put in the public domain every quarter, so there is a-

Q278 Chair: But under the new arrangements.

Richard Douglas: Under the new arrangements, the expectation would be that the Commissioning Board would make that publicly available.

Q279 Chair: I want to come to both Robert Naylor and Peter Smith, and then I will come to Heather. You have a blank sheet of paper at the moment, because the Department has failed to fill it. In that context, from your perspective as a practitioner, and your perspective with all the experience you have, what should be in the regulations to give us comfort on probity, accountability and VFM?

Sir Robert Naylor: As far as foundation trusts are concerned, we have a tried and tested process of governors who are elected; non-executive directors who are appointed by the governors; and the establishment of an audit committee, of which both I and my chairman are not members, but which we are invited to in the event that the audit committee has concerns. Certainly the governing body meetings in my trust, and I think in most trusts, have been public meetings, or certainly will be in the future.

Q280 Chair: How many people come?

Sir Robert Naylor: At the last AGM I think we had about 120 people. To a normal meeting I would say probably about 30. Of course, my trust is very high profile and therefore there is a lot of interest in what is happening. Also, our board of directors meetings are in public. Both I and my chairman endeavour to put as much in the public domain as we possibly can.

To come back to comments that David made a few minutes ago, I think it is important for public bodies such as foundation trusts not just to wait until David finds out that there is a problem. As soon as we identify that there is a problem, it is important that we put that into the public domain through our public board meetings and governors’ meetings. In the event that we think there might be a prospective problem in the future, but we are not sure about it, we declare that publicly and declare that to Monitor as soon as possible. I think that builds a strong bond of trust between governors and the board of directors, and I hope between the foundation trust and Monitor.

Q281 Chair: That is your view. I think about my own not yet foundation trust. I think they would be less willing to share that publicly. They would feel threatened.

Q282 Mr Bacon: The trouble is you are one of the leading chief executives of one of the best hospitals in the world, so you are looking at it from a perspective of best practice, and that is what you do. You walk your talk as a matter of course. So what you have just said-for you-is unsurprising. Whether everyone else behaves like you-or would-is really the question. That is what is not clear.

Q283 Meg Hillier: May I just ask, as an indication of what we could be losing here, when you have your open board meetings in your very big and, as my colleague says, internationally renowned hospital, how much do the media cover those meetings? If you have presented it in public in papers and then had a public meeting, would that hit the media?

Sir Robert Naylor: Less so in the board of directors meetings. We always used to have several members of the media there, but I have to say in recent times we have had less attendance at meetings, but we do send all our board papers to the media and we often get requests from the media subsequently about what happened.

Q284 Meg Hillier: Again, best practice is that you send it out. But if you were a foundation trust, as Richard Bacon says, and perhaps not so good, you might not bother to be as open about sending it out. In terms of local transparency, it sounds all very well, but actually a lot of the public do not turn up, and the media these days have fewer journalists available to turn up, so quite a lot could get hidden in that weight of paper.

Sir Robert Naylor: The process of being a foundation trust-we have been a foundation trust for seven years now; we were in the first wave of foundation trusts-is a journey you go through. When we started, we had a group of governors who were very inexperienced. We had non-executive directors inherited from the previous regime, whom we did not appoint ourselves. Over the last seven years, I have to say there has been an improvement in the quality of governors through election and nominations from stakeholder organisations. There has also been an improvement in the quality of non-executive directors. For example, we recently advertised a non-executive director post and we had 65 applicants. When we first became a foundation trust we had to go out and head-hunt non-executive directors. That may have something to do with the reputation of the organisation and people wanting to be associated with it, but all foundation trusts are on this journey. Even those that have not made foundation trust status yet will at some stage have to become part of a foundation trust regime and go through the same kind of journey. It is a learning process. I hope that what we and other early foundation trusts do is a good exemplar for others following on behind.

Q285 Chair: Let me move to Peter Smith. Do you want to comment from your perspective and experience?

Professor Smith: Can I just make the point that I am making these comments as an academic with, as you so delicately put it, a lot of experience in the public sector? I have, in the past, been a commissioner at the Audit Commission.

I think that three fundamental criteria-the Committee has already touched on them-should be applied to judging these proposals. The first is accountability, the second is independence, and the third is consistency. Chair, you referred to the critical difference between local government and the NHS, which is local accountability through the ballot box. I have been on record right from the start saying that I thought the ability of foundation trusts to appoint their own auditors was flawed and one of the reasons for that is that they are using public money that the whole of the country has an interest in. It is not just local people who have an interest in the use of that money. It is important that the independence of the audit is assured. That is accountability and independence.

The third point that I want to make is about consistency. Public services do not have the measures of profitability that we have in the competitive sector, so we rely very much on inter-organisational comparisons, which the Audit Commission recognised right from its very beginnings. It published comparisons on a wide range of issues. The importance of this inter-organisational comparison is being lost. It is not just a matter of putting information into the public domain; it is about putting it out in a consistent fashion so that people across the country can judge how public money is being spent and assess efficiency and effectiveness. We need absolute clarity in the NHS. We need to be assured that it is being run well and that it is helpful to citizens and politicians when they seek to come to a view as to whether public money is being spent wisely.

Q286 Chair: Very helpful. Can we have comments from all of you on those points, because they are the key issues? Go on, have a go, and then Peter Smith can come back at the end, if he wants.

Dr Bennett: If I may, I will also pick up on Robert’s comments. All FTs are required to publish the minutes of their board meetings and are required to hold their board meetings in public. It is fair to believe that they will not all be equally proactive in putting that out there, but they are all accountable to their locally elected governors. That is a layer of governance.

Q287 Chair: But on the whole, just tell us-we had this discussion before-what proportion of the local population vote? Even if we accept that the turnout for local government elections is about 30%, what is it, nought-point-what?

Dr Bennett: It is small, but they are there. They are there because they are proactively interested in their trusts.

Q288 Chair: But what is it? Have you looked at what it is?

Dr Bennett: I haven’t, no, but I accept that it will be very small as a percentage. Of course, it is the governors, not the board, who are appointing their own auditors. So in answer to Peter’s point, it is not the trust board appointing its auditors; it is the governors-

Q289 Chair: But the governors are a self-perpetuating group.

Dr Bennett: The governors are elected from among the membership.

Q290 Valerie Vaz: What do you do to pull all the information together? How do you stop a Mid Staffordshire, which you did not do?

Dr Bennett: As I said, we have this lengthy list of information, some financial, some quality and so on-

Q291 Valerie Vaz: I know you have the information, but what did you do? What could you do? You have the tools to do it, to pull together all this information within the foundation trusts, so that everyone knows about good quality, best practice, and perhaps to stop a Mid-Staffordshire. What could you do and what did you do? What powers do you have and what powers should there be to stop a further Mid-Staffordshire? We are talking about a third of the budget, aren’t we? The health budget is a third of Government spending, which is going to be dissipated among, well, we do not know who. PricewaterhouseCoopers? Grant Thornton?

Dr Bennett: I think most of it goes on staff at the provider trusts.

What do we do? We collect the information, we monitor the performance using this information and, as I said, when we see things starting to go off track we will start to intervene, at an escalating rate depending on the scale of the problem. In the case of Mid-Staffordshire, we are of course waiting for Robert Francis’s report to come out, but I think it is fair to say that we did not intervene soon enough. I hope we will not make that mistake again.

Q292 Valerie Vaz: So why should we be convinced that public money is going to be properly used under this regime if everybody wants to follow Monitor’s regime? Will we have to have inquiries over all the CCGs that will misspend public money?

Dr Bennett: I cannot speak for the CCGs, but in terms of the FTs the compliance regime that we are operating should give you reassurance that someone is monitoring beyond the local governance arrangements-monitoring what is going on and stepping in when there are indications of problems.

Q293 Valerie Vaz: You had that and you did not do it, so why should we be convinced that it will happen under the new regime-which we do not know about? Mr Douglas, I have to say, you have been sent down from the Department of Health, but this feels so much like what happened with the Health and Social Care Bill-there was absolutely no information at all. I think it is absolutely disgraceful for a public Department to be in this position where you do not give information to the Committee. You are wasting everyone’s time. You really should take it back to the Secretary of State that we are not happy.

Dr Bennett: Just to finish with your question about Mid-Staffordshire. You are quite right, we did not do everything correctly at Mid-Staffs. We sought to change the way we do things, significantly, as a result, and if Robert Francis recommends further changes we will make those as well.

Q294 Valerie Vaz: So we have to wait for an inquiry before you make changes-

Dr Bennett: No, we have already-

Q295 Valerie Vaz: You are missing the point, Dr Bennett. I am saying that you have got this in place, and you are recommending this framework for the new regime, but you could not spot this-or you did not want to, or you had a discussion with someone behind closed doors. How is it going to work the next time?

Dr Bennett: Which framework am I recommending?

Q296 Valerie Vaz: The framework for the current audit of the national health bodies. Is not everyone saying, "Look at the foundation trusts, they have done this well, let’s copy what they are doing"? We don’t know, do we? Didn’t someone say that?

Richard Douglas: I do not think it is quite as clear as that. What we said is that at the moment, under these arrangements, we do not plan any significant changes to the audit arrangements for foundation trusts. The audit arrangements for foundation trusts have operated for a number of years, they seem to operate effectively and the only area where as a result of the changes we might be looking at some modification is in who sets the audit code. At the moment it is Monitor, but for every other public body in the new world it is the National Audit Office. So the foundation trust side is the only area in which we would envisage any change. It would not be fair to say that David Bennett or Monitor have recommended this Foundation Trust approach across the rest of the public service.

Q297 Valerie Vaz: I am not saying that at all. We did not know, you did not give us any information, so we are trying to tease out what is going to happen.

Richard Douglas: As I said, it will follow the principles of the Local Audit Bill. An overall code of practice will be set for auditors; the expectation is that that will be set by the NAO, as it will be for local government. There will be quality assurance and regulation of compliance with that audit code, which we expect to be done in the same way as it is for local government. Within that, we would expect the clinical commissioning groups to be appointing the auditors to operate under the code. In that sense, you would expect it to be similar to the model for foundation trusts.

Q298 Chair: Each appointing its individual ones, not collectively buying it-not bulk purchasing.

Richard Douglas: One of the questions that we have to look at is whether, regardless of the benefits of local commissioners being responsible within a proper framework for appointing their own auditors, there are value-for-money and cost benefits in some degree of collective purchase. There is a question of collective purchase.

Q299 Chair: I want to pursue that, because Valerie’s point is very important. We should perhaps ask Peter Smith. What improvements do you see in the Monitor framework that will ensure that proper accountability protocols are in place so that another Mid-Staffordshire does not emerge? What needs to change? What would you build into the Local Audit Bill?

Professor Smith: One of the issues, which is not the fault of Monitor, is the current regulator set-up, with the split between CQC and the financial audit. I recognise that the role of the CQC requires different people to the role of a business regulator such as Monitor. However, in the end, the two have to come together, and I would really like to see some mechanism for integrating the judgments on quality and the judgments on value for money. Indeed, when health first went to the Audit Commission, that was done there. That really needs exploring quite hard, because the current regulatory mechanism does not seem to be working if it is letting things like Mid-Staffordshire slip through.

Q300 Chair: Do you want to add anything to that, Sir Robert?

Sir Robert Naylor: I think there are several comments to make. I was a chief executive of a major teaching hospital for 20 years before we became a foundation trust. We have been a foundation trust for seven years, and I can say that the compliance regime that is operated now by Monitor is infinitely better than anything that preceded it. The extent to which we have to report detailed information-not just on finances, but on quality assurance-is much more rigorous than it ever was previously. Of course, the same requirements do not apply to non-Foundation Trusts, and many such trusts will find it quite challenging when they have to operate within the Monitor compliance regime.

The second thing that I would say is that the audit fees that we now pay are about half of what we used to pay when we were effectively given our auditors-either the Audit Commission directly or a private company that had been delegated. The big difference is that we can now competitively tender for our external audit in a way that we could not previously. I believe that we now get a much better quality of audit.

My third point is that I expect our external auditors to look at not only our finances but all aspects of performance in the trust. In particular, I expect them to look at our quality accounts. Indeed, they did so last year, and they chose two things and we asked our governors to choose another area where we wanted them to look into our quality accounts in more detail. As a consequence of that, we exposed further information and improved the quality assurance that we could make back to Monitor. I therefore would not want the Committee to think that the external auditors just look at money. Broadening their remit to look at quality issues is an extremely important part of their role.

Q301 Heather Wheeler: I find that answer really interesting, because I am interested in where the drawbacks are in being able to appoint your own auditors. This is now cascading down to all of the other health bodies out there, and you have chosen to extend the auditor’s remit to value for money and best-practice in-depth reports, whereas other foundation hospital trusts that I am aware of use alternative accountants or consultants or whoever to do a one-off project that might cost huge amounts of money, but keeps it separate. You, however, have chosen to do the one thing. What we are looking for is to strengthen the Bill or to show areas of best practice that ought to be encouraged for the other parts of the health service that are going to be able to appoint their own auditors now.

Sir Robert Naylor: It is really a question of finding the best people to do the particular job. If we needed to have an in-depth investigation into something, we may well go to someone other than our external auditors to do that, but our external auditors can also do a very good job. The key issue in appointing your own auditors is having a clear separation of the governors, the non-executive directors, who are accountable to the governors, and the executive. For example, it would be entirely inappropriate for me to be involved in the appointment of the auditors. They have to be appointed by the governors, and one of the non-executive directors is appointed by the governors to be the chairman of the audit committee. There must be separation between those who are accountable-the governors-and those who are the accountable officers, who are responsible for making sure-

Q302 Chair: And are those your local arrangements, or are they Monitor’s arrangements?

Dr Bennett: That split happens across the whole sector. That is one of the points I wanted to make. If I just go back to the Mid Staffs situation and Peter’s comment about the split between Monitor and the Care Quality Commission. In those days it was not the CQC, of course-at the height of the problems it was the Healthcare Commission-and clearly there was a real problem in that relationship, which I hope is now fixed. Clearly the CQC is a different body to the HCC, and I hope that Monitor has also learned lessons from that.

Mid-Staffs was not a problem with audit. It was a problem with those who regulate quality failing to spot problems, and we were part of that. I recognise that and, as I say, I hope we have learned lessons. One of the lessons we learned was the need for us to pay much more attention to the quality issue, and we did at least a couple of things. One was we required foundation trusts to produce quality accounts. That is now required across all providers, but it was started between Monitor and the foundation trusts. The second thing is that we now look very explicitly at the issue of quality governance. Robert just explained that the auditors will look at things like the quality accounts when they do the audits, so it is more than just finances. We require that; we have written that into the audit code for foundation trusts precisely because we realised that there was a gap here, and not only was there a gap in requiring trusts to produce quality accounts and to look at their quality governance, but we needed to make sure they were doing it well. We then asked the auditors to review what they were doing as part of the audit process. That is a change that actually has come out of-

Q303 Chair: But I can think of one or two chief execs of NHS trusts-maybe not FTs yet-who would, if there was a critical report, manipulate the system to try to get rid of the auditors.

Dr Bennett: I suppose there is always the possibility of them trying to do that. This is where one would hope the local governance arrangements-the governors and the non-executive directors on the board-would spot what was going on.

Q304 Valerie Vaz: Mr Douglas, you said that the NHS commissioning board would not be looking at quality issues at CCGs didn’t you?

Richard Douglas: No, I didn’t say they wouldn’t deal with quality.

Q305 Valerie Vaz: You didn’t mention the word quality in the list of things they would be looking at.

Richard Douglas: What I was talking about was what the external audit arrangements would be. The commissioning board itself would be absolutely focused on quality. The main business they are in is getting the best quality possible from the amount of the money that we give them. That is different from the audit arrangements they would have in place.

Q306 Valerie Vaz: Can I quickly give you a scenario? You have the clinical commissioning board, and they can get independent providers and private providers. What happens if you get, for example, something like a Southern Cross situation, where they fall apart? Who carries the buck for that?

Richard Douglas: In any circumstance where there is a reliance on a particular provider, the commissioning board will have to put in place alternative arrangements if necessary. We have-and this applies similarly across foundation trusts-mechanisms in place to ensure that you have continuity of service across the system. So we will have to have in place alternative providers. I could not see a situation in the foreseeable future where there would be a significant private sector providers commissioning board that would be in the same sort of position that Southern Cross was.

Q307 Valerie Vaz: But presumably their auditors will have sent a certificate. I am going into company law. An auditor looks at the books and says whether it is satisfactory. Presumably, that must have happened with Southern Cross and with the independent companies. It has to fall apart first before the regime steps in.

Richard Douglas: The auditors would have to declare if they thought the organisation was not a going concern. As part of their audit opinion, they would have to say if they thought the organisation was not a going concern because they would have to value it on a different basis. We would also look at the particular role that David has for the foundation trust, the regulator, to have an eye to that as well. You would not just rely on audit opinion for that.

Dr Bennett: There are limitations to what audit can achieve. Even in the case of PIRs, we can see that. As for two of the recent PIRs on NHS trusts, one was your own trust when I think it had been in deficit for five years at the point at which the PIR was issued. So that is a little bit late. We would aim to try to spot it earlier. The same happened in South London when they were actually in special administration at the point at which a PIR was issued. It is not clear that audit is the answer.

Q308 Valerie Vaz: That is exactly what we are saying. A regime existed with the Audit Commission when you could look at that. But we are worried, as a Committee and because this is public money, that audit is not the answer, but that is where we seem to be heading.

Dr Bennett: What I would argue was missing, and this is more or less what Richard was saying as well, was that, for those NHS trusts, there was not the equivalent of Monitor doing what Robert has just described in terms of looking at all of these things in great detail on a quarterly basis and trying to spot problems well before they become serious.

Q309 Mr Betts: On the appointment of the auditor, what you were saying about having oversight or an overview of what happens is interesting, and last week we talked about the absence of that in local govt. Just to come back to the point that Douglas made when he talked of the benefits to the organisation of independently appointing its own auditor, I haven’t heard a single benefit mentioned yet.

Richard Douglas: Appointing your own auditor does give the organisation itself a real corporate stake in the assurance around its own work. It is not that it is owned by someone else. It is actually owned by it, and that is important.

Q310 Mr Betts: It is anyway, surely.

Richard Douglas: The relationship with the auditors is an important relationship and, for the board to feel that they own that is a lot of benefit.

Q311 Mr Betts: It is important once the auditor is doing the job, which is different from actually who appoints the auditor in the first place, isn’t it?

Richard Douglas: Well, partly, but in the appointment you will need to look at what is the best fit for that organisation in its particular circumstances. I agree entirely with Robert. You don’t want the executive team doing that. You want that to be the non-executive.

Q312 Mr Betts: But they do that, don’t they? They have a big input and a say. That the Government could have a serious input into this is fiction, isn’t it?

Sir Robert Naylor: As I said, from my experience I would absolutely keep myself entirely separate from the appointment of the auditors. That is a matter for the audit committee. As I said earlier, I am not a member of the audit committee, which again is an important discipline. If the audit committee is concerned about anything, it would call me.

Q313 Mr Betts: Is it a requirement that you aren’t a member of the audit committee?

Sir Robert Naylor: It is part of the code of practice.

Q314 Chair: Are members of your staff members? Is your director of finance a member of the audit committee?

Sir Robert Naylor: No, he wouldn’t be. No.

Q315 Mr Betts: But non-executive members of the board clearly are. You have a working relationship with them.

Sir Robert Naylor: I effectively work for them. They represent the governors and they are effectively my employer and my boss. At the end of the day, I do what they tell me.

Q316 Mr Betts: What would be the disadvantage if someone said, "There are only a limited number of firms that can do this work. These are your auditors for the next five years"? You would then develop that relationship on a proper working basis with them that Mr Douglas has just described. Why is it necessary for you or your audit committee to appoint the auditors for you to have a good working relationship with them?

Sir Robert Naylor: I can think of two reasons. One is to build on what Richard was saying, which is local accountability.

Q317 Mr Betts: To whom?

Sir Robert Naylor: Through the governors to the public whom we serve.

Q318 Mr Bacon: So you are already dependent on the vigour of the local newspapers. Is that what you are saying in that instance?

Sir Robert Naylor: Yes, to some degree.

Q319 Mr Bacon: What about your second reason?

Sir Robert Naylor: The second reason is purely financial. We get much better value from our auditors-as I say, about half the price going through competitive tender than we originally paid when the Audit Commission-

Q320 Mr Betts: We heard from local government people earlier that authorities such as Birmingham might be able to get as good, or even a better deal than they thought by doing their own, individual procurement, but many smaller local authorities felt the evidence probably was that they would need to combine together in some form or have some sort of national recruitment in order to get as good a deal. Is that true of the health service?

Chair: Most of the trusts are over £300 million, are they not?

Mr Betts: There would be a lot of kudos for an auditor to audit your trust, because of your reputation.

Sir Robert Naylor: The majority of foundation trusts are large enough to do their own procurement.

Q321 Chair: Are they mostly over £300 million?

Dr Bennett: It is a broader spectrum than that. That is probably around the average. Some are down in the region of £100 million to £150 million, and one or two that are very small are less than that.

Richard Douglas: For most foundation trusts, you would expect them to be in the position that Robert said. There will be some at the lower end where there may well be benefits, in terms of procurement, in going jointly to a provider.

Q322 Mr Bacon: It is interesting, because from what you have said, Sir Robert, you have a better service from your auditors for a lower price. What do you think was the principal cause-or causes-of the higher price and the poorer service beforehand? Was it an indifference, as it were, on the part of those who were procuring for a whole range of different hospitals, so they were handing it down Soviet-style, saying "Here is your auditor", without any attention to the quality or the price? I caricature that, obviously, but what were the underlying causes of it being more expensive and poorer quality beforehand, and now, cheaper and higher quality?

Sir Robert Naylor: It was simply the lack of competition. When we go out to procurement now for auditors, price is obviously a consideration, as is quality. So, there is competition between the various audit firms, whereas previously there was not. They were simply nominated and told which audit company we were going to have for the following three to five years.

Q323 Mr Bacon: What do you think about the draft Bill’s proposals on whistleblowers? Are they strong enough?

Chair: It is probably best to let David Bennett start on that, then Peter Smith can come in.

Dr Bennett: To be honest, I am not sure I have a strong view about whistleblowing. I think that the view of my staff would be that, broadly speaking, it is not clear that whistleblowing through the audit route works terribly well. Whether you are talking about FTs or outside the health sector, it is just an issue.

Chair: We find it absolutely invaluable in our work. I have been astounded by how valuable it is.

Q324 Mr Bacon: Why is it not valuable, Dr Bennett? Is it because, in the traditional way of such things, whistleblowers get screwed over by the system and they are not protected?

Dr Bennett: I suppose we are simply reflecting the fact that that is not a route through which we are seeing much. We do get a lot of whistleblowing coming directly to us, so there are alternative routes for people, certainly in foundation trusts, who want to blow the whistle, but we are not seeing it come through the audit route.

Q325 Mr Bacon: Is the quality of what you get coming directly to you high?

Dr Bennett: It is mixed, of course. Whistleblowing is always a very wide range.

Q326 Mr Bacon: Would you regard it as valuable?

Dr Bennett: Some of it is valuable and important.

Q327 Chair: And you, Peter Smith?

Professor Smith: I do not have any particular view on whistleblowing. It seems to me that it is not given enough seriousness in the Bill, but I have no particular view on how it should be strengthened.

Q328 Mr Betts: On the issue of comparability, from Monitor’s point of view, you have explained to us some of what you have been doing to try and get the financial information and draw those comparatives. Are we going to have similar arrangements as far as the commissioning side is concerned?

Richard Douglas: Yes, the commissioning boards themselves are very keen to make sure that we put in the public domain comparative information about the performance of clinical commissioning groups across the full range of performance on quality and on finance. So, we would expect to see, if anything, an even greater range of comparative data-a lot more than there is now.

Q329 Mr Betts: These are not going to be nice, little cosy arrangements with the various commissioning groups around the country to not explore the really difficult issues and challenge them.

Richard Douglas: No, they are not.

Q330 Mr Betts: We talked at the beginning about the potential differences-thinking about who drew the audit code up-between the foundation trust side and the commissioning side of the health service. Wouldn’t it be beneficial to have the same audit arrangements right through the national health service?

Richard Douglas: Shall I start off on that, David? I think as far as possible that is broadly the position we are trying to get to, where you have the single audit code of practice, you have a single arrangement for quality assurance and regulation, and you have a single arrangement for the scope of audit. I think there are differences, though, in the intermediate part of the system, between the role of a regulator like Monitor and the Commissioning Board, in relation to CCGs that passes public money through itself to go to the clinical commissioning group. So in a sense you need to have a slightly tighter arrangement around the commissioning side.

The basic principles we keep the same, but the flow of public money and the allocation through the commissioning places the Commissioning Board in a different place.

Q331 Mr Betts: That slightly implies you could have a laxer arrangement for Monitor, then.

Richard Douglas: It is not a laxer arrangement; it is a different arrangement. [Interruption.] I am not meaning to imply that it is laxer.

Q332 Chair: You are not saying that David Nicholson is going to run it in a really Stalinist way, therefore he does not need all the-

Richard Douglas: I come back to where David started on this. It is not just the audit arrangements that provide us with assurance. It is the way the management system works and the Commissioning Board as well.

Q333 Mr Bacon: Are you the Khrushchev of this new architecture, Dr Bennett?

Dr Bennett: I think we should withdraw the word "tightly".

I agree with Richard that details of the audit do need to look different for different types of bodies, so that we must have as much commonality as possible. At the moment, we set the audit code book and make sure that we get agreement from the Treasury, the Department and the NAO as we do that. I think that in any future arrangement, as long as we are still setting the audit code, we need to make sure there is as much commonality as possible.

As I was explaining a moment ago, there is a connection between what we are doing in our compliance function and audit and, in particular, what we can do is use the audit activities to test the reliability of the data we rely on for our compliance. For example, our innovation around introducing quality accounts and quality governance, which we did through compliance, we were able to reinforce by having it audited under the audit code.

Q334 Mr Betts: That is the way you use information, rather than the differences in the audit arrangements, per se, isn’t it?

Dr Bennett: The point is, we need to require these things to be audited and that is what the audit code says. It gives instructions to the auditors. If we were not able to say-

Q335 Mr Betts: Would that not be helpful, though, for people on the commissioning side to have exactly that set of information?

Dr Bennett: Except, because commissioners and providers look different, the details will be a bit different. So I think, in principle, yes, but in detail, some differences.

Q336 Mark Pawsey: Have those of you who have had powers for some time to appoint your auditor any advice for local authorities that now have those powers under the Bill?

Sir Robert Naylor: I have thought about this. In fact, we had a conversation with a number of my senior people yesterday to ask exactly that testing question. The structure of foundation trusts is obviously different to the structure of local authorities. It is exploring the differences in the structures and accountabilities that is key. The one key difference between foundation trusts and local authorities is that local authorities do not have non-executive directors. The non-executive director layer between the governors-

Q337 Chair: I think they would say their councillors are, you see. That is the difference that we are-

Q338 Mark Pawsey: Some local authorities are enthusiastic about this new power. I know others have great reservations. Can you reassure those with reservations?

Sir Robert Naylor: We equated the elected councillors to the elected governors, with all the caveats about a number of people who vote for Governors. From a democratic point of view, they are comparable, but beneath that there is no non-executive director layer as there is in foundation trusts. Therefore, if you are going to have an audit committee, where does the chairman of your audit committee come from? So that was the key difference that we could discern. I am not sure that I could help any more-

Q339 Chair: Which leads us towards some thinking we were doing earlier about independent chairs of the audit committee.

Sir Robert Naylor: Exactly.

Q340 Chair: Right. That is very helpful.

Q341 Valerie Vaz: You mentioned you are pleased about the competitive tendering process. How much does that cost?

Sir Robert Naylor: It costs us very little in relation to the audit fee for the period in question. Our current basic audit fee is £150,000 a year.

Q342 Chair: What is your turnover?

Sir Robert Naylor: Just under £800 million. It is very cost-effective. Again, in preparation for today, we did some comparisons with non-foundation trusts. Interestingly, we found that-I am not prepared to mention which particular non-foundation trust, but it certainly wasn’t yours, Chair-their audit fees, appointed by the Audit Commission, were in excess of three times higher than ours. So there are significant differences. The cost of actually going through a procurement process is relatively little. It is the internal preparation of a specification inviting the companies to tender and going through the process. It is effectively lost in the time of employees and non-executive directors and governors within the trust. Clearly it does have a cost, but it is insignificant in relation to the five-year cost of the audit itself.

Q343 Valerie Vaz: I would just say about the extra fees that sometimes people think it is public money, so they charge extra when no one is watching them, but there is scope to reduce fees when it is in the public domain. I am not sure I agree with you entirely that there is no scope. You must be using some money for this process of competitive tendering, because that happens all the time.

In terms of freedom of information, the regime does not kick in while you are undergoing this process, because presumably it is a private contractual arrangement. Is that right?

Sir Robert Naylor: I think we would have to examine carefully exactly what the question under the FOI was. If it was commercially in confidence, it could be excluded. Again, I have to say, to build on what I said earlier, I think it is extremely important that public bodies like mine are very open. We do our utmost to reply to all FOIs, so unless there was a real commercial conflict of interest, I am pretty sure that we would respond to the FOI request.

Richard Douglas: I should add, on the audit fee itself, it has to be declared separately in the accounts anyway, so there is specific provision that the audit fee has to be shown separately.

Q344 Chair: We are coming to an end. We need your stuff, Mr Douglas, and we might call you back. Mr Nicholson might make himself available next time. Beyond waiting for that, is there anything that would help us now as we prepare to tell the Government about the gaps and changes?

Professor Smith: Can I just underline how complex clinical commissioning groups are as enterprises? They are a creation that is qualitatively different from almost anything else in the economy. The deliverers of care are also deeply embedded in the running of the organisation. Huge amounts of public money are often delegated, sometimes even to the same people who are charged with governing the institution. That is a particularly sensitive area for audit. I think conventional models may not work and there may have to be additional safeguards built in.

Q345 Chair: Safeguards on independence, accountability and consistency?

Professor Smith: Absolutely. I would urge that those who are designing that scheme should take that fully into account. These are very unusual institutions.

Q346 Mr Bacon: Given that the NHS is increasingly buying in a whole variety of services from the private sector, do you see a risk that some clinical commissioning groups that are GP-led will end up buying services from entities that GPs themselves have a commercial interest in, and that there will be, as it were, a skewing of public resources towards bodies that provide those services where GPs have an extra financial benefit?

Professor Smith: The codes of practice within CCGs will have to ensure that safeguards are built in to ensure that those conflicts of interest do not arise. Part of the intention of the new arrangements is that new ways of dealing with health care will emerge from this. That will necessarily sometimes involve purchasing services from groups of GPs, so the important thing there will be that the correct governance arrangements are put in place to ensure that those who are involved in the purchasing-

Q347 Chair: And who will inspect those?

Richard Douglas: There is a mix of things here. Anything that is to do with the commissioning of primary care services themselves will be done by the commissioning boards, not the clinical commissioning groups, so primary care commissioning comes up to the commissioning boards. There is no potential for conflict there. For the clinical commissioning groups, where they buy in areas that are not primary care, they are subject to their internal governance, oversight by the commissioning board and, in a market sense, oversight by Monitor as well. The provider market has to operate fairly. There has to be fair pricing and fair purchasing across that part of the market.

Q348 Mr Bacon: Dr Bennett, Mr Douglas has just told you that you will be involved in this. Can you explain how?

Dr Bennett: He is right. The Government are going to be setting regulations. There are regulations, for example, governing what commissioners should be doing and how they should be doing it. We will be overseeing the application of those regulations.

Q349 Chair: If a commissioning group purchases from itself, will you detect that?

Dr Bennett: If there are issues about that being done inappropriately, then we can look at it.

Q350 Mr Bacon: You mean so long as it buys from itself appropriately, then it is not a problem.

Dr Bennett: There is not an absolute ban from buying from themselves.

Q351 Mr Bacon: Professor Smith wanted to say something.

Professor Smith: I am currently a member of the NHS Co-operation and Competition Panel which will soon be integrated into Monitor.

Q352 Mr Bacon: You didn’t get the latest memo.

Professor Smith: And that body is able to accept any complaints about breaches of proper market principles, proper procurement, unfair operation of the market and so on. We will investigate these and come to a judgment.

Q353 Meg Hillier: How will people know? If I am a patient and I go in and I get my big toe dealt with or my child gets their cough sorted out or whatever, I will be happy if I go away and that is sorted. Most patients will not dig through exactly how their CCG is spending the money. Mine in Hackney is full of really good people at the moment, while they stay on and do this job, but in time bad people could abuse the system. I am not clear how they couldn’t.

Professor Smith: This is exactly why you need a regulator rather than allow the market to operate. The regulator can act on behalf of patients.

Q354 Meg Hillier: How would the regulator know? The CCGs are quite small. If you take my borough of 270,000 people, it is just one London borough. You have 33 in London alone. I think the viability will shake down. You are talking about hundreds of bodies whereas before you had PCTs which had their pitfalls, but were easily identifiable. They had enough people in them to have a bit of self-checking in there. At a doctors’ surgery you can have GPs employing other family members to do the other jobs and you could have an entirely family-run GP practice. There is nothing against that in the law or in practice. It is perhaps not best practice but it happens. If you had a couple of big practices like that in an area, having dominance in the CCG, you can see how there is scope for bad people to do bad things. I cannot see what protection there is against that.

Dr Bennett: I don’t think patients will complain about this; it will be other providers, other GPs or people who want to compete with those GPs and feel that they are not getting an opportunity to do so because of this self-supply issue. That is where the complaints will come from.

Q355 Chair: Not really because if you want to get in there and get the business, you don’t want to upset your purchaser.

Dr Bennett: Peter will tell you that they get complaints from providers about the behaviour of PCTs which are not, in their view, giving them a fair crack of the whip. I have no reason to suppose that that will stop.

Professor Smith: I do think there is scope for increasing the ability of citizens, competitors and other practitioners to raise these issues, and to raise them possibly on an escalating scale of intensity.

Q356 Mr Bacon: Do you think that is not clearly enough defined yet? You mentioned that the body that you are currently on, which is going to integrate-to use your word-with Monitor will do some of this work, but do you think that it is inadequately set out, that the guidance is too weak or that it could be stronger? What is it precisely that you are saying needs doing?

Professor Smith: My own view is that the process works fairly well at the moment. I think someone raised the issue of providers being inhibited from referring because they want business elsewhere, and I think that that is an issue that needs to be addressed and it may, for example, be linked to the whistleblowing concern mentioned earlier. But we get complaints from a wide variety of people, with a wide variety of professionalism in those complaints. Some of them are just howls of anguish, others are legally backed submissions. I think we ought to be able to accept all those types-

Q357 Mr Betts: Will it be a requirement on auditors to check systematically to ensure that there is no conflict of interest in the awarding of contracts of this kind?

Richard Douglas: They would have to check that as part of their overall checks on the control systems within an organisation. Whether they would actually have to work through every single-

Q358 Mr Betts: Would it be a good idea to be more specific in the requirements on auditors that they should be doing this as a matter of course?

Richard Douglas: It is built into the nature of audit that if someone was procuring inappropriately or unlawfully the audit should be designed to identify that if it was significant. I think that just in the nature of audit you would expect auditors to be focused on those areas of risk.

Chair: That was a very useful exchange of views, and we look forward to your paper setting it out. Thank you very much, but I know you have all given up valuable time. We are very grateful to you.

Prepared 11th January 2013